Author Topic: 401K Savings to Pay Off My Student Loan? Need Suggestions  (Read 2870 times)

E in DC

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401K Savings to Pay Off My Student Loan? Need Suggestions
« on: March 15, 2016, 12:09:03 PM »
Hello Everyone-

     I made the decision to finally kill off the $50K balance of my student loan that I've been dragging around for about 15 years now.  I've really gone all-in by forgoing my 401K contributions until I'm done (I don't get a match), and throwing about $10K in cash at it out of the gate.  I'm at about $35K now, and I figure I'll have the whole thing paid off in about a year-and-a-half. 

     My questions is whether it would make sense on any level to withdraw the $35K from my 401K balance (currently about $60K) to pay the student loan off and shift gears into full-on investment mode sooner?  I know I'll take a tax hit by doing it, and that may be reason enough to stick with my current strategy, but I'm not sure what other drawbacks there may be.  On the flip-side, I really would like to be debt free this week instead of sometime next year. 

Thanks in advance for any insights!

-E in DC

     

therethere

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #1 on: March 15, 2016, 12:14:48 PM »
No. Just no. Don't do it. You are losing 10% penalty AND taxes on the withdrawl. Assuming you're in the 15% bracket + 6% for DC tax + 10% for penalty. You "need" 35k to payoff the loans but it would cause you to withdraw 46k.

Do you really want to have only 14k in retirement savings at what, 35 years old?

Jack

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #2 on: March 15, 2016, 12:15:45 PM »
No, that does not make sense. It also does not make sense to forego the 401k contribution just to pay down the loans either (but I'm sure some risk-averse person will come along shortly to dispute that).

By contributing to your 401K, you are gaining an immediate return equal to your marginal tax rate (minus the present value of that amount times your marginal tax rate in retirement), in addition to market returns. Both of those things tend to be larger than the return you get from paying down a student loan. You could argue that adjusting for risk changes things, and it can, but even disregarding the investment returns, the current-year tax advantages are still risk-free and significant.

Personally, I only throw extra money at my student loans after my HSA, 401k, and IRAs are already maxed out.

E in DC

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #3 on: March 15, 2016, 12:28:00 PM »
No. Just no. Don't do it. You are losing 10% penalty AND taxes on the withdrawl. Assuming you're in the 15% bracket + 6% for DC tax + 10% for penalty. You "need" 35k to payoff the loans but it would cause you to withdraw 46k.

Do you really want to have only 14k in retirement savings at what, 35 years old?

Great point.  I knew the tax hit would be bad, but that really lays it out.  Also, you're right.  It would be pretty depressing to only have 14K sitting in that account, for ANY reason.  I think I'll stick to the current plan.  Thanks!



E in DC

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #4 on: March 15, 2016, 12:34:23 PM »
No, that does not make sense. It also does not make sense to forego the 401k contribution just to pay down the loans either (but I'm sure some risk-averse person will come along shortly to dispute that).

By contributing to your 401K, you are gaining an immediate return equal to your marginal tax rate (minus the present value of that amount times your marginal tax rate in retirement), in addition to market returns. Both of those things tend to be larger than the return you get from paying down a student loan. You could argue that adjusting for risk changes things, and it can, but even disregarding the investment returns, the current-year tax advantages are still risk-free and significant.

Personally, I only throw extra money at my student loans after my HSA, 401k, and IRAs are already maxed out.

Also great points!  I'm killing it ASAP for a few reasons.  One of which is that I get a bit of help on the payment from my folks that I'd like to let them off the hook for.  I'm also well past the point where I can deduct the interest on the loan.  Otherwise, I guess I just get a lot more satisfaction out of having a clean slate, vs letting it hang out there.  Thanks!

nereo

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #5 on: March 15, 2016, 12:36:19 PM »
No. Just no. Don't do it. You are losing 10% penalty AND taxes on the withdrawl. Assuming you're in the 15% bracket + 6% for DC tax + 10% for penalty. You "need" 35k to payoff the loans but it would cause you to withdraw 46k.

Do you really want to have only 14k in retirement savings at what, 35 years old?

Great point.  I knew the tax hit would be bad, but that really lays it out.  Also, you're right.  It would be pretty depressing to only have 14K sitting in that account, for ANY reason.  I think I'll stick to the current plan.  Thanks!

To get straight to the point - why are you willing to forego retirement contributions and their tax-savings in exchange for getting rid of these student loans a year or two earlier?  What is the interest rate on the loan(s)?
At the minimum are you still contributing to your IRA?  you will never get another opportunity to fill those 'buckets' for this tax year again.

Frankies Girl

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #6 on: March 15, 2016, 12:40:06 PM »
Just to join in with the chorus of "no" you've received... it is a terrible idea to take any money out of your retirement account to pay off a school loan. Really read what Jack posted - it is often overlooked that you're gaining benefits for reducing your taxable income right now AND building up your retirement account at the same time. You can't get that time back, and you can't get the tax break/benefits back either. AND you'd pay a penalty just for the priviledge of accessing that money now, AND if you for some reason lose that job... that 401k loan is due in full pretty much instantly or you'll be hit with a huge tax bill and penalty.
https://ttlc.intuit.com/questions/1899463-what-happens-if-i-have-a-401-k-loan-and-lose-or-quit-my-job

And I also add in my opinion it's a pretty awful idea to stop contributing to retirement completely as well. You're robbing your future self of the next couple of years' worth of growth and benefits of reducing your current taxable income right now just to accelerate your repayments on something that doesn't need to be paid off by some specific date.

Other than the psychological aspect of crossing off "paid off school loan" from your life bucket list, you gain no benefit from at all, and you're actually hurting yourself.

I get wanting to pay off the school loan ASAP, but stealing from your future is not the best way to go about it. In fact, I'd say this is a really bad idea. If it was me, I'd immediately start the 401k contributions back up and pay off the loan in 5-ish years and be much better off.

Gone Fishing

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #7 on: March 15, 2016, 12:55:27 PM »
Also great points!  I'm killing it ASAP for a few reasons.  One of which is that I get a bit of help on the payment from my folks that I'd like to let them off the hook for.  I'm also well past the point where I can deduct the interest on the loan.  Otherwise, I guess I just get a lot more satisfaction out of having a clean slate, vs letting it hang out there.  Thanks!

If your parents are paying a portion of the payment, why not just tell them to stop and pick it up yourself?  If they are real stubborn, you could refi the debt to get them out of the picture.  Depending on the rate it may make sense to refi anyway.

If you can't deduct the interest, you are probably in the 25%+ plus bracket which could equate to paying 25%+ penalty (plus any state taxes) on the portion you prepay annually, especially if you plan on withdrawing your 401(k) through a IRA ladder at 0%,  like many on the forum.  You could also lose out on other potential deductions/credits by ramping up your taxable income.  Another thing to consider is you are also missing out on the liability/bankruptcy protection that a 401(k) gets.

 

Mother Fussbudget

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #8 on: March 15, 2016, 01:03:34 PM »
I get wanting to pay off the school loan ASAP, but stealing from your future is not the best way to go about it. In fact, I'd say this is a really bad idea. If it was me, I'd immediately start the 401k contributions back up and pay off the loan in 5-ish years and be much better off.
+1 at what Frankies Girl (and others) have said.  Do not take out $$ from a tax advantaged account to pay off a non-tax advantaged loan. 
Instead, throw your emergency fund at the loan, and keep *the idea* of taking a loan against your 401k  as an "EMERGENCY" fund.

E in DC

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #9 on: March 16, 2016, 07:55:44 AM »
I get wanting to pay off the school loan ASAP, but stealing from your future is not the best way to go about it. In fact, I'd say this is a really bad idea. If it was me, I'd immediately start the 401k contributions back up and pay off the loan in 5-ish years and be much better off.
+1 at what Frankies Girl (and others) have said.  Do not take out $$ from a tax advantaged account to pay off a non-tax advantaged loan. 
Instead, throw your emergency fund at the loan, and keep *the idea* of taking a loan against your 401k  as an "EMERGENCY" fund.

Thanks, and thanks for all of the other great feedback from everyone on the thread!  I'm definitely not going to touch my retirement funds for any reason, other than retirement ; )   

lbonga1

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #10 on: March 16, 2016, 08:21:04 AM »
I asked about pulling money from my Roth to pay my student loans, and the consensus was still no. :) I know the feeling of just wanting to be done with them....we'll get there!

Jack

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #11 on: March 16, 2016, 08:29:07 AM »
Thanks, and thanks for all of the other great feedback from everyone on the thread!  I'm definitely not going to touch my retirement funds for any reason, other than retirement ; )   

Great! Now, have you reconsidered your plan to reduce contributions yet?

boarder42

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Re: 401K Savings to Pay Off My Student Loan? Need Suggestions
« Reply #12 on: March 16, 2016, 08:34:11 AM »
Thanks, and thanks for all of the other great feedback from everyone on the thread!  I'm definitely not going to touch my retirement funds for any reason, other than retirement ; )   

Great! Now, have you reconsidered your plan to reduce contributions yet?

you're giving up likely 10% tax savings minimum by forgoing 401k contributions.